NAMA and the housing market

asdasd

I was thinking about putting this in either AH, or the Accomdation and Proerty forum, but the smarts are here.

I presume most people here will agree that property must continie to fall. I think that NAMA will play a role. Here is why:

Firstly to explain NAMA, as I understand it.

Banks have non-performing loans.
Said non-performing loans are backed up by assets - i.e. development including housing, and commercial.
NAMA buys the non-performing loans at a discount. Say 20%.
The banks hand over some equity in this as compensation ( so the government will have, most probably, a majority shareholding in the banks - if not full nationalisaion).
NAMA then owns the assets.

Now I have no idea how much housing is involved here. But it must be significant. In fact I think I heard some economist say that NAMA is the property market for the next decade.

so what effect will this have on prices? A lot I think. With commercial property we could allow NAMA to sit on the assets for a decade and get our money back. With property?

Clearly not. Ghost estates will become havens for squatters and junkies if not absolutely locked down, and would be useless at the end of the decade if the housing is burnt out. So the NAMA will sell the houses, either to councils, or at a loss. There will be ideological arguments to do so, and make housing affordable etc.

This will take all these people out of the market for rent, and for entry level housing - probably pushing down the prices of anything that comes on the market to the NAMA level. NAMA dictates the market. Is the market.

Am I wrong?

Économiste Monétaire

asdasd wrote: »

I was thinking about putting this in either AH, or the Accomdation and Proerty forum, but the smarts are here.

I presume most people here will agree that property must continie to fall. I think that NAMA will play a role. Here is why:

Firstly to explain NAMA, as I understand it.

Banks have non-performing loans.
Said non-performing loans are backed up by assets - i.e. development including housing, and commercial.
NAMA buys the non-performing loans at a discount. Say 20%.
The banks hand over some equity in this as compensation ( so the government will have, most probably, a majority shareholding in the banks - if not full nationalisaion).
NAMA then owns the assets.

Now I have no idea how much housing is involved here. But it must be significant. In fact I think I heard some economist say that NAMA is the property market for the next decade.

so what effect will this have on prices? A lot I think. With commercial property we could allow NAMA to sit on the assets for a decade and get our money back. With property?

Clearly not. Ghost estates will become havens for squatters and junkies if not absolutely locked down, and would be useless at the end of the decade if the housing is burnt out. So the NAMA will sell the houses, either to councils, or at a loss. There will be ideological arguments to do so, and make housing affordable etc.

This will take all these people out of the market for rent, and for entry level housing - probably pushing down the prices of anything that comes on the market to the NAMA level. NAMA dictates the market. Is the market.

Am I wrong?

Some of that is assuming NAMA takes direct control of the collateral behind the loans and, as an aside, I wonder what proportion of those are non-recourse; I know of one developer with personal liability for a failed project. You could consider three asset management companies set up to fulfil different roles: Residential; commercial (e.g. office space and large scale real estate holdings); and one for empty or half finished development land (rezone this land as agricultural, or to be used by MNCs as incentive packages with some losses being recovered indirectly, et cetera). NAMA could follow a previous Swedish precedent by taking majority control of companies, i.e. the debtors of the banks, and restructure, or unwind, them responsibly. Although, that didn't work out great and there's work out there criticising their approach at the time.

The DoF documents have been pretty light on details, so far, as to what proportion of the oft cited €90bn is residential, commercial, development, et cetera, so we can only hypothesize on what assets we have. The original NAMA document phrased the ‘assets covered’ section in such a manner that it would be mostly development, pre-completion, loans. However, if you look at the figures from the CBFSAI on Construction and Real Estate & Business Activities, that amounts to only ~€121bn stock of debt. There’s something odd about the figures the DoF are providing, I can’t quite figure it out yet but I suspect they’re not considering the loan balance. Either that, or it's a number they pulled out of the sky following a casual conversation.

Could NAMA be a major secondary market per se? Sure, considering the size relative to our economy. How noticeable that is depends on their operational time frame; wind up in 5 years, or 20? NAMA could sit (literally) on an asset or it could give a long moratorium on the debt, leaving the responsibility on the debtor to maintain the asset and not 'realising' losses for the state. That's a consideration for, say, primary residence borrowers where we have recourse beyond the collateral itself. NAMA's ultimate ability to manipulate rents and prices depends on the collateral behind the loans it will purchase; it may not have a lot of completed projects, that happen to be empty, to do this.

If NAMA ends up with "ghost estates" then your idea of cooperation with councils is a possibility. Allow the councils to sub lease the property as affordable housing. They would, probably, be in better condition than being left derelict. There's lots of different ways you could see NAMA operating, maybe a NAMA first-time buyer auction. We still have a rising population, although likely future emigration will dampen demand. I would be careful about propelling asset prices down, as a policy initiative, just like there's issues with government trying to re-inflate a bubble; although, I'm not sure if you're proposing that we hasten the fall to some form of present state equilibrium. We could always package up some ABS to sell to the Chinese in a couple of years, things will have died down by then and given rent seeking and such...

I'm not quite sure of this:

The banks hand over some equity in this as compensation ( so the government will have, most probably, a majority shareholding in the banks - if not full nationalisaion).

I believe they'll hand over common equity because they'll be grossly under capitalised after a haircut on the assets and they'll be legally required to raise the money on a rights issue, not necessarily as a bonus to the state for buying them. Patrick Honohan gave the idea of having warrants attached to the stock, which could be exercised to recover any realised losses by NAMA. With a large discount on the loans they may end up under majority ownership anyway, before this.

If I misinterpreted anything, feel free to correct. Interesting idea on NAMA's potential size relative to the overall market.

asdasd

I'm not sure if you're proposing that we hasten the fall to some form of present state equilibrium.

I am not proposing it, but i think the ideological push would be to give that housing to councils as social housing, or sold as affordable housing to low income groups, or both. Imagine the Joe Duffy show if entire Estates become homes for squatters etc., when the alternative would be to sell, or rent to low income workers.

And we can't really hold onto a large amount of residential property in the hope of a profitable selloff after ten years, as the market price will fall when the assets are offloaded onto the market anyway, possibly causing another economic contraction. Bettter to take that medicine now.

Économiste Monétaire

If we were left with a lot of empty housing, that's a fair point to consider. Although, you might have some complaining about such a massive transfer payment. That's a touchy area for middle income tax payers, seeing banks get above market prices for the assets (no matter the discount rate) and then to be strapped with the burden of the debt to pay for NAMA (through higher taxes), while people who may not contribute to this debt (with tax payments) getting "free" housing (I think they pay some form of rent ). However, if the opportunity cost (next best alternative) of this was just to watch them fall apart, then that's not much of a dilemma there.

It would be great if we had some hard numbers on empty, newly completed dwellings and to match them up to social housing waiting lists. I guess you could look to completions over the last two years as a guesstimate. I suppose there's not much else we can do but hypothesize...

eamonnm79

Économiste Monétaire wrote: »

If we were left with a lot of empty housing, that's a fair point to consider. Although, you might have some complaining about such a massive transfer payment. That's a touchy area for middle income tax payers, seeing banks get above market prices for the assets (no matter the discount rate) and then to be strapped with the burden of the debt to pay for NAMA (through higher taxes), while people who may not contribute to this debt (with tax payments) getting "free" housing (I think they pay some form of rent ). However, if the opportunity cost (next best alternative) of this was just to watch them fall apart, then that's not much of a dilemma there.

It would be great if we had some hard numbers on empty, newly completed dwellings and to match them up to social housing waiting lists. I guess you could look to completions over the last two years as a guesstimate. I suppose there's not much else we can do but hypothesize...

Dermot aherm mentioned a figure of 40,000 units during a counter rant on Qand A last Monday.
You are correct though. If there was any type of proper investigative journalism in this country we should know how many houses/units that NAMA will have to take ownership of.
As I said in a previous post, the idea that the government are going to have to hire mass numbers of security or possibly the army to stop people taking the law in to their hands.
If a non corrupt demogogue emerges in this country there could be huge political change. I honestly believe everything is up in the air at the moment. Are perception of certainty in our little Island is evapourating

silverharp

My only obsevation is that it will take 3-5 years to get any clear picture. Zoned development land seems the easiest, it simply will have near agricultural value unless you can find investors to buy and hold for 10 years which seems unlikely as there cant be much of a business case for it.

It would seem that commercial rents will have to plummet over the next few years, I can only guess that there will be a lot of new build and vacant properties around the country (anyone walked down Mount Street recently). As leases come due there will be an obvious incentive for rents to drop. There are still office blocks going up around the IFSC, in reality these buildings cannot be rented for anywhere near a breakeven cost. It will just come down to how much "mark to market" they want to engage in

silverharp

I've heard of demand destruction , seems like supply destruction is making a comeback in the US

https://www.youtube.com/watch?v=qvrc7x3Amps

Économiste Monétaire

The NTMA have set up a website for NAMA (link) and there's a crude example of a loan transfer here, if anyone is interested.

Dob74

Économiste Monétaire wrote: »

The NTMA have set up a website for NAMA (link) and there's a crude example of a loan transfer here, if anyone is interested.

Thanks for the link.

NAMA looks good on paper.
But I think NAMA is going to be bad for the taxpayer.
I can see the developers and the banks getting a free ride.
Can the government who bowed to every wish of the Banks and developers
take a tough line with them? I don't think so.

amacca

maybe this is irrelevant/out of date but I think I read last weekend that NAMA would only be taking the larger bad debts of the hands of the banks leaving them free to deal with a smaller number of major developers and leaving the banks with the much more numerous "smaller" developers.

Would that not mean that NAMAs future actions would have much more of an effect on large commercial developments (commercial property) than smaller residential developments, certainly outside of cities anyway. I could be wrong but I cant imagine the likes of Sean Dunne et al ever bothering too much with ghost housing estates in longford, athlone etc.

Thats not to say I dont think that what was described in the original post isnt very possible (using units for affordable housing etc) just that NAMA wont necessarily be the driving force.

eamonnm79

I have a couple of questions with regard to the example.
Am I right in saying that the government are proposing to buy a 65% of the Asset for 40 million?

If so will they have shared ownership with the developer?

If so what is the split (is it still a 65/35 split)?

what form does the developer equity take?
What if that is still not worth 35million?
Im doing this quickly so I could be wrong but I would appreciate clarification

niall2j

Looks to me like:

NAMA buys a €65m loan for, say, €40m, entitling them to all future cashflows. The developer originally has 35% equity in the deal.

If the asset value declines below €100m, the developer would take the first losses (up to €35m).

If the asset value holds above €65m (or increases), NAMA will receive the original value of the loan (plus interest). The developer would see the rest of any upside.

If the asset value declines below €40m (a drop of 60%), then NAMA would be in a loss making position.

asdasd

That's a good deal for the State.

eamonnm79

asdasd wrote: »

That's a good deal for the State.

A very good deal.

Why would any developer agree to that?
Is it because they (like Mick wallace )have no intention of paying anything back and they know the equity is only worth a small fraction of the 35million.

Are you sure Niall 2j?
It would make you think the government already know its worth a good bit less than the 40 million.

niall2j

eamonnm79 wrote: »

Are you sure Niall 2j?

I'm not sure at all - that was simply my understanding of the example posted

eamonnm79 wrote: »

Why would any developer agree to that?

I don't see how/why a developer would be asked to agree to anything. As I understand it, NAMA is buying loans from banks, not properties from developers. If the loan is not repaid, then I assume they may exert some claim/influence on how the underlying asset is managed, but only if the loan is not repaid.

Also, it's only a good deal in the example if €40m plus is a realistic valuation.

asdasd

Preumably the devloper can pay back the loan in full, or lose the equity he put in if the development was given as collatoral. Like a house.